Solid Canada growth, sentiment accelerates talk of July rate hike

OTTAWA (Reuters) - Canada's economy grew for a sixth consecutive month in April, while a central bank survey of business sentiment showed firms were feeling more upbeat, accelerating expectations for a possible sooner-than-expected rate hike.

The economy grew by 0.2 percent in April, Statistics Canada said on Friday, matching expectations and indicating Canada continues to pick up speed after a slump triggered by the oil price crash in 2014.

The data suggested the economy carried momentum into the second quarter from the first, when growth hit an annualized 3.7 percent pace, the best in the G7, said David Madani, economist at Capital Economics.

"Needless to say, this will reinforce market speculation that the Bank of Canada will raise interest rates soon," Madani said.

Bank of Canada policymakers have taken a more hawkish tone this month, ramping up market expectations for a rate increase on July 12.

Friday's business survey, which showed companies are more optimistic about future sales and exports, added to expectations of a July hike, with odds now greater than 50 percent.

FILE PHOTO: People shop during the going-out-of-business sale at Target Canada in Toronto, February 5, 2015.Mark Blinch/File Photo

The survey is consistent with broad-based improvement in the overall economy and may have prompted the central bank to shift away from its previous cautious tone, said Benjamin Reitzes, senior economist at BMO Capital Markets.

With only trade and jobs data ahead of the bank's next meeting, "there is little to keep the bank from hiking rates," Reitzes said.

Chances of a rate hike in July increased to 57.7 percent following the survey, up from 51.4 percent just before it was released and significantly higher than the 20 percent markets were pricing after subdued inflation data last week.

The Canadian dollar was stronger against the greenback at C$1.2990, or 76.98 U.S. cents, after earlier touching a nine-month high following the gross domestic product data.

The central bank cut rates twice in 2015 to keep the economy on track. A Reuters poll in May before the central bank adopted a more hawkish tone had showed most economists did not expect a rate hike until 2018.

Statscan said 14 out of the economy's 20 sectors grew in April. Service-producing industries posted a 0.3 percent gain while the goods sector was largely unchanged as a decline in manufacturing offset growth in mining, quarrying and oil and gas extraction.

Separately, Statscan said Canadian producer prices in May fell for the first time in nine months, dropping by 0.2 percent from April.

Reporting by David Ljunggren; Additional reporting by Fergal Smith in Toronto, Leah Schnurr in Ottawa; editing by Meredith Mazzilli and Grant McCool